Financing and Mode of Entry in Foreign Markets
35 Pages Posted: 22 Mar 2015
Date Written: March 21, 2015
We study the mode of entry decision of a multinational firm with and without financing constraints on the local firm. We find that the multinational's expected profits are a discontinuous function of its belief about demand in one mode of entry. These discontinuities are due to the endogeneity of reservation utilities as well as the interaction between an agency problem and a game. Financing constraints lead to an increase in the multinational's profits from joint venture, while its profits from foreign direct investment decrease if the probability of high demand is low but increase otherwise. Examples show that joint venture arises for a larger set of beliefs when the local firm is financially constrained. This effect is strengthened as technology transfer increases, fixed cost of entry increases and as the multinational's cost advantage decreases.
Keywords: Multinational, Joint venture, Financing, Contracts
JEL Classification: D43, D86, L24, F12
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